You Ask, We Answer: Tax Subsidies for Oil Companies

In honor of Earth Day on April 22, we're talking this week about federal spending on energy and environment. Betty from Hailey, Idaho, wrote to us about subsidies for oil companies. Thanks for writing, Betty – it's an interesting subject. Warning: We may have to get a bit wonky.

The federal government subsidizes all sorts of things through the tax code. For instance, you may take a tax deduction for interest on your home mortgage. That's a subsidy for homeowners. Similarly, there are many such tax subsidies that benefit corporations. And a few of those benefit oil companies in particular. All told, tax subsidies for corporations cost the Treasury around $180 billion in fiscal 2011. Of that total, the White House says $4 billion went to oil companies.

President Obama has called for an end to subsidies for oil companies. But this issue is a little more complicated than it seems. Oil companies benefit from subsidies specific to their industry, but they also benefit from subsidies that are available to all corporations – for example, the wonky-sounding tax deduction for depreciation of machinery. Thus, an attempt to remove all subsidies for oil companies would probably require a broader overhaul of the corporate tax code.

That's not a bad thing, many people would say. Removing subsidies for corporations is an idea that has quite a bit of support these days. But here's something to keep in mind: Corporate tax subsidies are not a silver bullet for closing budget deficits. These subsidies cost the Treasury around $180 billion in fiscal 2011, which was about 13 percent of the deficit that year. So if your concern is deficits, this isn't the solution you've been waiting for, though it could be part of a bigger plan.

For reasons of fairness, however, we may indeed want to end these subsidies, which amounted to 9 percent of corporate profit in 2011. Tax subsidies for regular people totaled 7 percent of all wages and salaries. In other words, the tax code subsidizes corporations more per dollar of income than it does regular people.